25% of all-time global GDP produced since 2000 – true!

05/07/2012 / New economics / Posted by Soeren Steen

About a year ago, The Economist produced a graph which has been making the rounds. It depicts the development in global economic output over the last 20 centuries, representing the output of each century as a percentage of combined output since AD 1. The graph, along with some commentary, can be found here, and it looks like this (click for larger version):

As you can see, it also depicts the number of human living years as a percentage of total for 20 centuries, but let us put that aside and concentrate on the economic statistic.

The dark columns representing economic output are very small indeed for many centuries, accounting for less than 1% during the first 12 centuries and less than 5% as late as the 19th century. By contrast, the 20th century alone accounts for some 55% of combined output, and the first decade of the 21st century adds a further 23%, so that a total of some three quarters of global output has been produced since 1900. And, yes, almost one quarter of that derives from the most recent decade!

It is an astonishing statistic, and we used it to good effect during our recently finished project In 100 Years – starting now, a project on whether and how we can achieve sustainable growth in the future, applying a 100-year time horizon.

On the face of this data, economic growth appears anything but sustainable, in fact it looks more like an explosion of economic output since 1900 than like any stable and controllable progression. And that is of course part of the point of bringing this picture up in the context of working with sustainability: to illustrate the enormous speed and inertia of global economic development, thereby giving an idea of the huge scale of the challenge that we are facing when searching for future sustainability.

But can it really be true? Isn’t it just a dubious academic fabrication produced by economists fiddling with dubious concepts and numbers? Does this data bear any resemblance with the real world at all?

Exponential growth really is that powerful

The exceedingly right-heavy graph might give the impression that the growth rate has been increasing over the centuries, including in the most recent decade. Yet, the world is currently in crisis and everybody complains about the lack of growth. So how can these observations be consistent?

Part of the answer lies in the nature of exponential growth, meaning a constant annual percentage increase of a stock. If a stock keeps increasing by 3 per year after year, it doubles in less than 24 years, quadruples in 49 years, and multiplies by a factor of 19 in 100 years. The addition in the 100th year is an amount more than 18 times larger than the addition in the first year, indicating a quite right-heavy development indeed. This phenomenon is also known as compound interest: A constant rate of growth produces progressively ever-larger additions to a stock.

Still, could any plausible constant rate of growth over 2,010 years result in fully one quarter of the total being added in just the last ten years? Well, the exact growth rate producing this result can be calculated, and the answer is 2.9 per cent. (Or, to be more precise: 2.918600896 per cent).

This is well within actual experience of economic development which usually fluctuates in the 1 to 5 per cent range. Crisis-struck Western countries may currently be struggling to make the 2.9 per cent level, but China and a range of other “emerging” countries are comfortably above, and the world as a whole is projected to achieve 3½ per cent this year, down from 4 per cent in 2011, while annual growth rates during the last couple of decades have averaged 3.6 per cent – actually trending upwards over the last decade, crisis notwithstanding.

The graph below (click for larger version) illustrates a stylized growth process applying this calculated constant rate of annual growth over 2012 years, assuming an initial stock of 1 in the year 1 AD. As numbers aren’t even visible before around 1800, it actually doesn’t look all that different from the Economist graph, does it?

So, maybe the rate of growth hasn’t been increasing over time. Could it be that a more or less constant rate of growth has prevailed since the year AD 1 bringing output to where it is today by way of a process looking like The Economist depiction?

Well, actually no. There are at least two obvious problems:

First, why would the economy grow by a constant annual growth rate? The short answer is capitalism, in the sense that the economic model which guides both thinking and behaviour comes with a systematic tendency to invest part of a years’ economic output in expanding the capital stock, thus increasing the resources available for future production. The idea of compound interest driven by merchants, businessmen, accountants and the financial system, underlies this view of the economy, and seemingly powers the total economy. But while this may have been the case since the industrial revolution around 1800 (and since Karl Marx’ writings that “capital produces yearly a surplus-value, of which one part is yearly added to the original capital”), surely it wasn’t in the preceding centuries and millennia.

Second, even if the graph at first glance looks strikingly similar to the one presented by The Economist, its end result is in fact astronomical and out of all proportion to the actual record. It states that economic output this year will be around 1.37*1025 times larger than that of the year 1 AD. Assuming global economic output in 1 AD was $1 (that is, one single dollar!), this years’ global GDP would be no less than around 170 billion times larger than it actually is ! Yes, exponential growth really is that powerful.

Historical evidence

Given that The Economist’s graph is based on work by an economic historian, the late Angus Maddison of the OECD, it is hardly surprising that it would be backed by the historical evidence – and estimates – assembled by this very source.

Maddison based his estimates on available data from a variety of sources in order to project GDP back in time. Some of his estimates are rather speculative. In fact, Maddison simply assumes that the growth rate of per capita GDP was 0 before 1500 AD. This follows the idea of Thomas Malthus who famously hypothesized that any increase in human living standards beyond subsistence level would immediately be eliminated by an increase in population. Thus, growth in world GDP in the preceding centuries equals growth in human population, which is of course almost equally impossible to estimate with any accuracy when you move backwards into the mists of history.

Obviously there is a lot more to the painstaking task of studying economic history, converting the evidence into a time series on world GDP, and I am in no position to evaluate the work of Maddison.

But here are some of his headline numbers for the last couple of millennia divided into three phases (click for larger version):

This indicates that the global rate economic growth has indeed increased dramatically over the last couple of millennia, and especially since the industrial revolution in late 18th century as both population and living standards have taken off. And the feeble growth of both economic output and population before 1800 makes it all the more plausible that combined economic output since the year 1 AD is heavily concentrated in the recent century and, indeed, decades.

But… can it go on?

So, back to the initial observation: This development looks more like an explosion than any stable or controllable process. So, can it go on?

Well, it can, assuming economic output and growth does not rely on resources and inputs that are limited. This is a big assumption. We only have one planet, and the human desires that are driving economic growth tend to involve converting finite physical resources into tangible consumer products, in the process releasing all kinds of waste with potentially destructive consequences for the global environment on which we rely.

Yet, as we grow richer, our pattern of consumption tends to include a larger component of intangibles – health care, entertainment, education, hairdressing and other services, and so on. After all, there is a limit to how many steaks you can eat every day. Also, production technology is constantly being refined in order to minimize resource use and waste for any given unit of output.

So just how strong is the pull on Earth’s resources that continued economic growth gives rise to? Is there any straightforward link between economic growth and resource use?

Well, maybe not straightforward, but the link certainly is there. At one of the Copenhagen seminars of the In100Y project, Danish scientist Katherine Richardson in her talk presented a couple of graphs depicting the development in some indicators of human activities and the earth system’s responses, respectively.

Activities and resource use look like the top graph (click for larger version).

And the response of what Richardson calls the ‘Earth system’ looks like the bottom graph (click for larger version)

It is striking how similar the profiles of all these indicators are: Heavily skewed to the right, i.e. resource use and stress factors steeply increasing in the recent century and decades, very much resembling an exponential growth path.

And so, the answer is quite obvious: This cannot go on. Many of these indicators represent factors that are limited in supply and crucial to our well-being. And all of them may combine in complex ways that risk endangering climatic and other biospheric balances in unknown and unforeseen ways. Our current path of development is not sustainable.

Transformation is necessary

At the In100Y seminars we had inputs from many sources trying to address this enormous sustainability challenge that will be playing itself out over the next century. We had a presentation from the Steady State school of thought which proposes a zero growth model that replaces growth with redistribution, so that poverty can be reduced without increasing economic output.

Other contributions were less radical in political terms, though maybe not in their demands for rethinking and transforming our path of development.

And the overall conclusion is this: We need to transform our path of development, and we need to start now. Optimistic contributions pointed to signs that this transformation is in fact under way: Levelling off of population growth, increasing public and political awareness of the issues, an increasing focus on sustainability in products, technologies, and the corporate world, etc.

And maybe we also see the beginnings of a broad movement to rethink and transform our desire for ever-larger material consumption into more immaterial, less resource-intensive, but ultimately more meaningful pursuits. And maybe such phenomena wouldn’t show up in the GDP statistics!

--------

Sources:Angus Maddison: The World Economy. A Millennial Perspective. OECD Development Centre Studies, 2006.J. Bradford DeLong: Estimating World GDP, One Million B.C.-Present. http://econ161.berkeley.edu/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.htmlIMF: World Economic Outlook 2012 World Bank: World Development Report 2012 Kathrine Richardson: Perceptions of the Human-Earth relationship through time. Talk given at Copenhagen Seminar #3 of the In100Y project. Slides: http://in100y.dk/downloads/presentation-sem3/Kathrine_Richardson__2_Nov.pdf In100Y Pre-Analysis articles: http://in100y.dk/articles/other-articles/ ISSUES 2: This way, please! Preferred futures 2112. House of Futures, April 2012. Various articles. Read it online here or order you copy by sending an email to